Microeconomics...

where demand meets s

upply…
Section 1: Microecono
mics
Section 1: Microeconomics
1.1 Competitive markets: dem
and and supply
1.2 Elasticity
1.3 Government intervention
1.4 Market failure
1.5 Theory of the firm and mar
ket structures (HL only)
1.3 Government Interv
ention
 Unit Goals
Students should be able to define, diagram
, give examples of, and evaluate:
 Indirect taxes
 Subsidies
 Price controls
1.3 Government Intervention

1.3.1 Indirect taxes

(Quantitative questions)
1.3.2 Subsidies
(Quantitative questions)
1.3.3 Price controls
(Quantitative questions)
 1.3 Government Intervention

1.3.1 Indirect taxes

 Specific (fixed amount) taxes and
ad valorem (percentage) taxes and th
eir impact on markets
 Tax incidence and price elasticity of d
emand and supply (HL only)
Syllabus content
1.3.1 Indirect taxes
 Specific (fixed amount) taxes and ad valorem (percentag
e) taxes and their impact on markets
 Explain why governments impose indirect (excise) taxes.
 Distinguish between specific and ad valorem taxes.
 Draw diagrams to show specific and ad valorem taxes, and analyse their impacts on
market outcomes.
 Discuss the consequences of imposing an indirect tax on the stakeholders in a marke
t, including consumers, producers and the government.
 Tax incidence and price elasticity of demand and supply
(HL only)
 Explain, using diagrams, how the incidence of indirect taxes on consumers and firms
differs, depending on the price elasticity of demand and on the price elasticity of sup
ply.
Quantitative questions:
 Plot demand and supply curves for a product from linear functions and then illustrat
e and/or calculate the effects of the imposition of a specific tax on the market (on pri
ce, quantity, consumer expenditure, producer revenue, government revenue, consu
mer surplus and producer surplus).
 1.3 Government Intervention

 Specific (fixed amount) taxes and a

d valorem (percentage) taxes and their
impact on markets
 1.3 Government Intervention
An indirect tax is a tax imposed upon expenditure o
n goods and services, e.g. value added tax, goods a
nd services tax, or sales tax.
Reasons why gov’ts impose indirect (excise) taxes:
• To raise government revenues.
• To discourage consumption of demerit goods (go
ods that create negative externalities), e.g. cigare
ttes and alcohol.
TWO types of indirect taxes:
• A specific tax (flat rate or per-unit tax) is an indire
ct tax where a fixed amount is placed on each uni
t of a product, e.g. a tax of $1 per unit.
• An ad valorem tax is an indirect tax where it is a p
ercentage tax on price, e.g. a tax of 15% of price.
− Eg. value added tax (VAT), or general sales tax.
− Ad valorem means “according to value”.
Specific and a
d valorem taxes
− Specific taxes: para
llel shift by tax amount.
− Ad valorem taxes: g
ap widens/gets bigger a
s price rises.

CC P. 63, PB P. 99
 Indirect taxes: impacts on market
An indirect tax raises firms’ c
osts of production (CoP), shi
fts S curve upwards/left by t
he amount of the tax, and le
ss is supplied at every price.
• Taxes raise Ps: Pe to P1
• Taxes reduce output: 0Q
e to oQ1
• Market size shrinks: 0Q
e to 0Q1
• Employment↓

CC P. 64, PB P. 99-100 PB P. 101

 Indirect taxes: stakeholder consequences
• Consumers suffer.
Consumers pay higher P and rece
ive less of the product. Tax decre
ases consumer surplus as it raise
s price.
(CE may rise/fall - on relative PE
D/PES )
• Producers suffer.
Producer revenue decreases - inc
ur extra costs, produce less and
make less profits.
• The government benefits.
Government revenue=…
CC P. 64, PB P. 99-100
 1.3 Government Intervention

 Tax incidence and price elasticity of d

emand and supply (HL only)
 1.3 Government Intervention

Definition
Tax incidence (burden) is a measure of the c
onsequences of a tax on all the affected par
ties. It is the amount of an indirect tax paid
by consumers of a good or producers of a g
ood.
− “Who ends up paying a tax?”
− “Who pays what proportion of a tax?”
Tax Incidence on consumers an
d firms differs, depending on
PED and PES. (So do gov’t reve
nue & market size.)
 PED=PES, tax burden is shared
equally by consumers and prod
ucers.
 PED>PES, tax burden is greater
on producers.
The more elastic D relative to S, t
he less gov’t revenue, and the gr
eater market size shrinks.
 PED<PES, tax burden is greater
on consumers.
The more inelastic D relative to S,
the greater gov’t revenue, and th
e less market shrinks.
CC P. 64-5, PB P 101-3
Government and indirect tax: A quick summary
This is why governments usually tax goods for
which PED is relatively inelastic. Addictive goo
ds, alcohol and cigarettes, are frequent target
s of excise taxes as a result.
When D is relative inelastic, D falls by a propor
tionately smaller amount than P rises, governm
ents will gain high revenue and yet not cause a
large fall in employment and thus will harm ind
ustries less.
 1.3 Government Intervention

Quantitative questions
Linear functions & specific tax
• Plot demand and supply curves for a product fro
m linear functions and then illustrate and/or calc
ulate the effects of the imposition of a specific tax
on the market (on price, quantity, consumer expe
nditure, producer revenue, government revenue,
consumer surplus and producer surplus).
Formula:
When the govt places a specific tax on a product, eg
a $1 tax per unit, whatever P consumers pay, $1 mus
t be given over to the govt. Thus, producers will rece
ive $1 less than the new equilibrium P.
The NEW S function:
Qs(tax) = c + d(P - tax)
Steps:
1) Plot D & S curves from linear functions
2) Illustrate/calculate effects of a specific tax on market
:
①price, quantity
②consumer expenditure, producer revenue, go
vt revenue
Example 1: D & S functions of a product:
Qd= 2000 –200P Qs= –400 + 400P
a) Plot the D & S functions on the graph.
b) Calculate equilibrium P & qty.
Qd=Qs: 2000–200P=–400+400P
∴Pe=$4, Qe=1200 units
c) What is consumer expenditure?
C.E.= $4x1200=$4800
d) Calculate producer surplus &
consumer surplus.
Producer surplus
= 1200x(4–1)x½
= $1800
Consumer surplus
= 1200x(10–4)x½
= $3600
Now a specific tax of $1.5 is imposed on the product
.
e) What is the new S function?
Qs’=–400+400(P–1.5): Qs’=–1000+400P
f) Add the new supply curve on the graph.
g) What happens to market P & qty traded?
P↑to $5, qty↓to 1000 units
h) What happens to consumer expenditure?
C.E.=$5x1000=$5000
↑by $200
although C is lower
i) What happens to
producer revenue?
P.R.=$(5–1.5)x1000=$3500
↓by $1300
j) How much tax revenue
does the govt receive?
Tax revenue
k) What are consumers’ & producers’ shares of tax b
urden? Indicate both on the graph.
Consumers’ T.B.=$1x1000=$1000 (pink □)
Producers’ T.B.=$0.5x1000=$500 (purple □)
l) Why is there such a difference b/t shares of t. burden
?
Consumers bear more of tax burden because their
D is inelastic at that P. Hence, producers are able t
o pass on more of the burden to consumers.
m) What is the net loss in
consumer surplus? Indi
cate it on the graph.
Net loss of C.S.
=$(5–4)x(1200–1000)x½
=$100 (yellow Δ)
n) What is the net loss in
producer surplus? Indicat
e it on the graph.
Net loss of P.S.
=$(4–3.5)x(1200–1000)x½
=$50 (green Δ)
Example 2: PB P. 104-6
The original DF & SF for cigarettes are:
Qd = 1600 – 200P
Qs = 600 + 300P
Question:
Assume the gov’t places a $1 tax on each p
ack of cigarettes, calculate the effects of th
e tax on the market.
1. Calculate Pe & Qe Diagram: PB P. 104-6
• Before tax:
Qd=1600–200P, Qs=600+300P: Pe=2, Qe=1200
• After tax: Qs(tax)=600+300(P-1)=300+300P
Ptax=2.6, Qtax=1080
2. Calculate expenditure/revenue
• Change in consumer expenditure:
(2.6×1080)-(2×1200)=408
• Decrease in producer revenue:
[(2.6×1080)-(1×1080)]-(2×1200)=-672
• Total govt tax revenue: a+b+e+f=1×1080=1080
Consumer t.burden: a+b=0.6×1080=648
Producer t.burden: f+e=0.4×1080=432
3. Calculate welfare
• Loss of consumer surplus: a+b+c=684
• Loss of producer surplus: d+e+f=456
• Total welfare loss: a+b+c+d+e+f=1140
• Net welfare loss=total welfare loss–govt t.revenue
= 1140-1080=60
 1.3 Government Intervention

1.3.2 Subsidies
 Impact on markets
Syllabus content
1.3.2 Subsidies
 Impact on markets
 Explain why governments provide subsidies, and describe examples of subsidies.
 Draw a diagram to show a subsidy, and analyse the impacts of a subsidy on market o
utcomes.
 Discuss the consequences of providing a subsidy on the stakeholders in a market, incl
uding consumers, producers and the government.
Quantitative questions:
 Plot demand and supply curves for a product from linear functions and then illustrat
e and/or calculate the effects of the provision of a subsidy on the market (on price, q
uantity, consumer expenditure, producer revenue, government expenditure, consum
er surplus and producer surplus). (HL only)
 1.3 Government Intervention

Definition
A subsidy is a payment from the government t
o a firm, for the purpose of increasing the pro
duction and supply of a good.
A subsidy is the amount of money given to pr
oducers of a product by the government. A su
bsidy increases the supply of the good by effe
ctively lowering the firms’ costs of production
.
 1.3 Government Intervention

Why a government subsidizes? (Examples)

• To encourage consumption of merit goods b
y lowering P. (healthcare, education)
• To guarantee S of essential/necessary goods.
(basic food, power source-oil, natural gas, coal)
• To support a particular industry. (ind
ustry creating much employment, critical for eco
nomic security (steel) or of political influence.)
• International trade: to protect home industry.
(by lowering costs to enable domestic produ
cers to compete with overseas trade.)
 Subsidy: impacts on market
A subsidy reduces firm’s CoP, shi
fts S curve downwards/ right by
amount of subsidy, and more is s
upplied at every price. Pe
• Subsidies lower prices.
• Subsidies increase output. Psub
• Market expands from one prod
ucing Qe units to one producin
g Q1units D
Qe Qsub
• Employment in this industry m
ay increase as a result
• subsidized domestic industry b
ecomes more competitive in th
e global market
CC P. 68, PB P. 108
 Subsidy: stakeholder consequences
• Consumers benefit.
Consumers pay lower P and get
more of the good. Subsidy increa
ses consumer surplus as it lower
s P.
(CE may increase/fall – on relativ
e PED/PES )
• Producers benefit.
Producers receive much more re
venue.
• Governments suffer.
Government pays subsidy=…

CC P. 68, PB P. 108
(Optional content)
To what extent does a subsidy lower price? --
ultimate effect depends on relative PED&PES.
• PED=PES, the price will fall by half of the su
bsidy
• PED>PES, the price will fall by less than half
of the subsidy
• PED<PES, the price will fall by more than ha
lf of the subsidy

Diagram: CC 1st edition P. 69-70

 Evaluate subsidy: A quick summary
• OC of G on a subsidy: other alternative G projects.
• “Who is paying taxes?” While a subsidy allow consume
rs to buy goods at a lower price, they are also taxpayer
s who fund subsidy.
• Debate in international trade: whether subsidy allow fi
rms to be inefficient, if they do not have to compete wi
th foreign producers? What damage will it do to foreig
n producers who do not receive subsidies from their g
overnment?
E.g. high-income countries give billions of dollars of subsidi
es to their farmers, leading to over-production and damagi
ng to small-scale farmers in developing countries. Since far
mers in developing countries do not receive subsidies from
their government and have to compete with low prices of
high-income country farmers who do receive subsidies.
 1.3 Government Intervention

Quantitative questions
Linear functions & subsidy
• Plot demand and supply curves for a product fro
m linear functions and then illustrate and/or calc
ulate the effects of the provision of a subsidy on t
he market (on price, quantity, consumer expendit
ure, producer revenue, government expenditure,
consumer surplus and producer surplus).
Formula:
When the gov’t subsidizes the production of a produ
ct, e.g. $3 per unit, the producers will receive $3 mo
re than the P consumers pay.
The new S function:
Qs (sub) = c + d(P + subsidy)
Steps:
1) Plot D & S curves from linear functions
2) Illustrate/calculate effects of a subsidy on market
:
①price, quantity
②consumer expenditure, producer revenue, go
vt revenue
③consumer surplus, producer surplus
Example 1:
Cotton: Qd= 30 –4P Qs= 6 + 2P
P in $/kg, Qd & Qs in millions of kg
a) Plot D & S functions on the graph.
b) Calculate Pe & Qe.
Qd= Qs: 30–4P=6+2P
∴Pe=$4/kg
Qe=14 million kg
c) What is the consumer e
xpenditure on cotton?
C.E.=$4x14=$56 million
Now a subsidy of $3/kg is given to domestic p
roducers of cotton.
d) Add the new supply function on the graph.
e) What happens to the market P & qty traded?
P↓ to $3/kg, qty↑ to 18 million kg
f) What happens to the consumer expenditure?
C.E.=$3x18=$54 mn
↓ by $2 million
although C is now higher
g) What happens to the pr
oducer revenue?
P.R.=$6x18=$108 mn
↑ by $52 million
h) How much does gov’t have
to give in cotton subsidies?
Subsidy
=$(108–54)=$54 mn
i) What is the change in consumer surplus? Indicate i
t on the graph.
↑in C.S.=$(14+18)x1x½=$16 mn (yellow trapezium)
j) What is the change in producer surplus? Indicate i
t on the graph.
↑in P.S.=$(14+18)x2x½=$32 mn (green trapezium)
k) What is the net effect of th
e subsidy on welfare? Indicate
it on the graph.
Net loss of welfare
= Cost of subsidy
– increases in C.S. & P.S.
=$(54–16–32) mn
=$6 mn (pink ∆)
Example 2: PB P. 109-11
The original DF & SF for cotton are:
Qd = 30 – 4P
Qs = 6 + 2P
Question:
Assume the gov’t grants a $3 subsidy on eac
h kilogram of cotton, calculate the effects o
f the subsidy on the market.
1: Calculate Pe & Qe Diagram: PB P. 109-11
• Before subsidy:
Qd=30–4P, Qs=6+2P: Pe=4, Qe=14
• After subsidy: Qs(sub)=6+2(P+3)=12+2P
Psub=3, Qsub=18
2. Calculate expenditure/revenue:
• Change in consumer expenditure:
(3×18)-(4×14)=54-56=-2
• Increase in producer revenue:
[(3×18)+(3×18)]–(4×14)=108-56=52
• Total subsidy cost (gov’t expenditure):
a+b+c+d+e+f+g=3×18=54
3. Calculate welfare
• Increase in consumer surplus: e+f+g=$16
• Increase in producer surplus: a+b=32
• Total welfare increase: a+b+e+f+g=16+32=48
• Net welfare loss (deadweight loss)
= total welfare increase–total subsidy cost
= c+d=48-54=-6
 1.3 Government Intervention

1.3.3 Price controls

 Price ceilings (maximum prices): ratio
nale, consequences and examples
 Price floors (minimum prices): rational
e, consequences and examples
Syllabus content
1.3.3 Price controls
 Price ceilings (maximum prices): rationale, consequences
and examples
 Explain why governments impose price ceilings, and describe examples of price ceilin
gs, including food price controls and rent controls.
 Draw a diagram to show a price ceiling, and analyse the impacts of a price ceiling on
market outcomes.
 Examine the possible consequences of a price ceiling, including shortages, inefficient
resource allocation, welfare impacts, underground parallel markets and non-price ra
tioning mechanisms.
 Discuss the consequences of imposing a price ceiling on the stakeholders in a market
, including consumers, producers and the government.
Quantitative questions:
 Calculate possible effects from the price ceiling diagram, including the resulting short
age and the change in consumer expenditure (which is equal to the change in firm re
venue). (HL only)
 Price floors (minimum prices): rationale, consequences a
nd examples
 Explain why governments impose price floors, and describe examples of price floors,
including price support for agricultural products and minimum wages.
 Draw a diagram of a price floor, and analyse the impacts of a price floor on market o
utcomes.
 Examine the possible consequences of a price floor, including surpluses and governm
ent measures to dispose of the surpluses, inefficient resource allocation and welfare
impacts.
 Discuss the consequences of imposing a price floor on the stakeholders in a market, i
ncluding consumers, producers and the government.
Quantitative questions:
 Calculate possible effects from the price floor diagram, including the resulting surplu
s, the change in consumer expenditure, the change in producer revenue, and govern
ment expenditure to purchase the surplus. (HL only)
 1.3 Government Intervention

 Price ceilings (maximum prices): ratio

nale, consequences and examples
 1.3 Government Intervention
Definition
A price ceiling (maximum price) is a maximum
legally allowable price for a good, set by the g
overnment, below the market price, aiming to
protect (low-income) consumers.
• Price ceiling - upper limit of the price
• Often governments take this step to make b
asic goods more affordable for the poor.
 1.3 Government Intervention
Examples
A maximum price is usually set on necessity g
oods and merit goods, which are important to s
ocial welfare, so governments want all people,
even the poor, to be able to consume them.
• Food price controls: on agricultural goods an
d food during times of food shortage, e.g. in
war and natural disaster, to ensure food for
the poor.
• Rent controls: on rented accommodation, to
ensure affordable housing for low-income ci
tizens.
 Impact of price ceiling: shortage
P S

Pe

maximum
price
shortage

O Qs fig
Qd Q
Price ceiling: i
mpacts on market
If the government impo
ses a maximum price fo
r a good, there will be a
n excess demand (short
age) existing in market.

CC P. 71, PB P. 113
 1.3 Government Intervention

Consequences of a price ceiling:

• Shortages
• Inefficient resource allocation
• Welfare impacts
• Underground parallel markets
• Non-price rationing mechanisms

CC P. 71, PB P. 113-4,
• Shortages: decreased market size. LR, if all producers use cheape
r or less inputs, supply may shrink further, and shortages may get
more severe.
• Inefficient resource allocation
• Welfare impacts: decreased (worse) product quality of products.
LR, producers may use cheaper/less inputs to reduce costs.
• Underground parallel markets (black/informal/illegal market): co
nsumers can’t buy enough in legal markets, may pay a higher pric
e to get goods.
• Non-price rationing mechanisms: in shortage, P mechanism can n
ot perform rationing function, other rationing means are used:
− Government-created ration cards or vouchers
− Special barter deals arranged with seller (will increase good P).
− ‘First come, first served’ basis, leading to queues developing in
shops, or firms adopting waiting lists. Waiting in line for a scarc
e good is common.
− Sellers’ preferences. Producers decide who gets goods. Goods
are allocated by who the consumer is - is he a regular/attractiv
e/‘important’? Market is no longer impersonal but becomes ‘p
ersonal’, discrimination may result.
− Random basis, e.g. by ballot
− Coupons in times of war
Government measures to reduce resulting shortages
Shortages create ‘unfair’ proble
ms. To maintain Pmax, governm
ents take measures to fill gap in
D, eliminate/reduce shortage.
• Increase S (shift S curve right)
• Offer subsidies or tax relief to
firms, encourage produce more.
• Gov’t direct production
• Governments release previous
stocks into market.
• Reduce D (shift D curve left)
Encourage production of more a
nd cheaper substitutes.

CC P. 71-2
 1.3 Government Intervention

Effect of Pmax: stakeholder consequences

• Consumers benefit or suffer?
− In short run, consumers benefit as they pay low
er price for the good.
− In long run, consumers will consume less of the
good. Also, product quality may get worse.
• Producers suffer.
Producer revenue decreases.
• Gov’ts suffer.
Gov’ts incur a cost to pay a subsidy to producers.
 1.3 Government Intervention

Quantitative questions
Linear functions & maximum price
• Calculate possible effects from the price ceiling di
agram, including the resulting shortage and the c
hange in consumer expenditure (which is equal to
the change in firm revenue). (HL only)
Effects of price ceiling
Steps:
1) Resulting shortage
2) Change in consumer expenditure
(= change in firm revenue)
 Example 1:
DF & SF of rented accommodation:
Qd=140–0.5P Qs=3P
P: monthly rent in $/m2
Qd & Qs: qty of rented space in millions of m2
a) Plot D & S functions on the graph.
b) Calculate equilibrium rent
& quantity.
Qd= Qs: 140–0.5P=3P
∴ Rent=$40/m2
Qty=120 million m2
c) What is total expenditure
on rents?
Total expenditure on rents
=$40x120 million
=$4,800 million
Now a maximum monthly rent of $30/m2 is impose
d on rental market.
d) Calculate Qd & Qs at the ceiling rent.
At $30/m2: Qd=140–(0.5x30)=125 million m2
Qs=3x30=90 million m2
e) Is there an excess D or an excess S?
How large is it? Indicate it on the graph.
An excess D (shortage):
125–90=35 million m2
f) Calculate the change in tot
al expenditure on rents.
New total rents
=$30x90=$2,700 million
down $2,100 million
g) What can gov’t do to sol
ve the problem in (e)?
It may provide subsidized
low-cost rented
accommodation to
eliminate the shortage.
Example 2: CC P. 71-2, PB P. 119-120
• Excess demand is …
• Consumer expenditure & producer revenue
are the same amount, falling from…to…by…
• The govt could pay a subsidy to firms, shift S
curve right to meet Qd at PMAX. Total subsidy i
s…
 1.3 Government Intervention

 Price floors (minimum prices): rational

e, consequences and examples
 1.3 Government Intervention
Definition
A price floor (minimum price) is a minimum le
gally allowable price for a good, set by the gov
ernment, above the equilibrium price, aiming
to protect producers.
• Price floor - price support for producers
• The government wants to protect producers
because their products are important or nec
essary, or it wants to support employment i
n a particular industry.
 1.3 Government Intervention
Examples of price floors
A minimum price is usually set on important
products, e.g. agricultural goods, and worker
s’ wages.
• Price support for agricultural products: Wh
en prices have fluctuations, or face foreign
competition, the government tries to raise i
ncomes for farmers.
• Minimum wages: a form of price floor, a leg
al minimum price for labour, set by the gov
ernment. The government wants to protect
workers, ensure them to earn enough to le
ad a reasonable existence.
 P
Impact of price floor: surplus
S

minimum
surplus
price

Pe

O Qd fig
Qs Q
Price floor: imp
acts on market
If the government impo
ses a minimum price fo
r a good, there will be a
excess supply (surplus)
existing in market.

CC P. 73, PB P. 116
 1.3 Government Intervention

Consequences of a price floor:

• Surpluses
• Government measures to dispose of the s
urpluses
• Inefficient resource allocation
• Welfare impacts

CC P. 73-4, PB P. 117
• Inefficient resource allocation
Inefficiency, resource misallocation, and a waster
of resources:
- Since firms will not be concerned about costs, th
ey may produce protected products more than t
hey should, and produce less of other products t
hat they could produce more efficiently.
- An incentive to overproduce is created. E.g. too
much land will be allocated in production of this
farm product.
Government measures to dispose of surpluses
In surplus, producers get around
price controls and sell surplus fo
r lower P. To maintain Pmin, go
v’ts take measures to fill gap in
S, eliminate/reduce surplus.
• Increase D (shift D curve right)
• Gov’ts buy up surplus at Pmin.
− Store: expensive storage costs.
− Destroy: wasteful
− Sell abroad: foreign govts’ angry r
eaction (dumping).
− EU agricultural policy: pay farmers
to “set aside” land.
• Advertising, or limit imports b
y protectionist policies.
• Limit S by quotas.
CC P. 73-4
 1.3 Government Intervention

Effect of Pmin: stakeholder consequences

• Consumers are worse off.
Consumers pay higher P and consume less of the goo
d.
• Producers are better off.
Producer revenues increases. (Inelastic PED for ag
ricultural products - P direction)
• Governments suffer.
To buy the surplus, gov’t expenditures will rise by
increased taxes, or its spending in other areas has
to decrease. So taxpayers (consumers and produc
er) eventually bear burden of this policy, or spend
ing on education and healthcare will be cut back,
harming all people’ benefit.
 1.3 Government Intervention

Quantitative questions
Linear functions & minimum price
• Calculate possible effects from the price floor diag
ram, including the resulting surplus, the change in
consumer expenditure, the change in producer re
venue, and government expenditure to purchase
the surplus. (HL only) 
Effects of price floor
Steps:
1) Resulting surplus
2) Change in consumer expenditure, producer
revenue, & gov’t expenditure to purchase t
he surplus
Example 1: DF & SF of wheat:
Qd=170–0.2P Qs=20+0.3P
P: in $/ton, Qd & Qs: in millions of tons
a) Plot D & S functions on the graph.
b) Calculate the equilibrium P & qty.
Qd= Qs:
170–0.2P=20+0.3P
∴P=$300/ton
qty=110 million tons
c) What is consumer expendit
ure?
C.E.
=$300x110 million
=$33 billion
Now a minimum P of $350/ton is granted by govt.
d) Calculate Qd & Qs at minimum P.
Qd=170–(0.2x350)=100 million tons
Qs=20+(0.3x350)=125 million tons
e) Is there an excess D or an excess S?
How large is it? Indicate it on the graph.
An excess S (surplus):
=125–100
=25 million tons
f) Calculate change in consum
er expenditure.
New expenditure
=$350x100
=$35 billion
An increase of $2 billion
Example 2: CC P. 73-4, PB P. 120-1
• Excess supply is…
• Consumer expenditure & producer revenue
are the same amount, increasing from…to…
by…
• The gov’t need shift D curve right, create a n
ew equilibrium at PMIN, the new D curve wou
ld be D+government buying.
• (A quota to maintain a minimum price)
Q Which one of the following price controls
would involve setting a minimum price r
ather than a maximum price of a good (o
r factor)?
A. Controls on rents to protect tenants on l
ow incomes.
B. Controls on wages to protect workers on
low incomes.
C. Controls on basic food prices to protect c
onsumers on low incomes.
D. Controls on transport fares to protect pa
ssengers on low incomes.
E. None of the above.